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tv   Bloomberg Real Yield  Bloomberg  November 2, 2019 5:00am-5:30am EDT

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>> the u.s. economy delivering stronger than expected jocks growth validating the economy is in a good place. as the united states and china look to close out of phase one trade deal. we begin with the big issue, an unexpected solid payrolls report. >> this is certainly a solid labor market report. >> very solid report. >> good numbers. >> strong. >> strong. >> across the board. >> the jobs number did not
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disappoint. >> we've not only had a strong report but a revision higher. >> the upward revision to the prior two months. >> don't write off the economy just yet. it's got a lot of fuppedmental strength. >> the u.s. economy is very resilient. >> a lot stronger than people think. >> the fed is in a good spot. >> i don't think that the fed does anything differently as a result of this other than pat themselves on the back. >> a pat on the back. >> this is like a picture perfect soft landing is what they're on track for. >> joining me around the table, bob, prima and gershen. to begin with you a solid payrolls report. i thought we would make this show by making up excuses for a weak jocks number. we we have a strong -- jobs number. >> i don't think this number told us a whole lot. we've known the market is strong. is slowing, but i think the
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big question is is the slowdown is a manufacturing slowdown, is that having an impact on the labor market? not yet. it actually solidifies this. i'm not sure the fed is done because at some point when businesses have cut back they're going to have to cut back on hiring. >> you think the jury is still out on the economy. >> i think it is. global growth continues to be weak. the china numbers not showing the big rebound. we haven't had any stimulus. go back to what chairman powell said no business executive has gone to him saying because interest rates they're not cutting. how are we solving this? we're cutting interest rates. i don't know if they're putting out the right stimulus. but if the fundamentals are still week i think it will slow down. so we're not seeing the sudden drop in payroll that we're used to. >> i think it was an ok report from the rather mo rose expectations. let's remember it's when that heavily distorted with the gm
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strike, it will be revised. it's backward looking. i think what we should do is step back and say if it's so wonderful which the market seems to be pricing in today why does g.d.p. continue to drift lower? why are we at 1.9% g.d.p. growth and not at 2.9%? i wouldn't put too much into a single report today. >> did all of that resonate with you? >> i probably agree. the number was strong but we didn't learn anything new by that. at 10:00 we saw the manufacturing number. the good news is it ticked up but still very weak about a standard deviation below what's normal. at some point those are going to have to reconcile. either we'll get a recovery or more likely we'll end up seeing it spill over into business confidence and it will impact hiring, unemployment. and what's important is looking at the equity markets are telling two different stories. the equity markets starting with the consumer. it's a much bigger part of the economy but they're signaling
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caution. >> let's get to the analysis first. you touched on something important. the sub50, to counterize the u.s. economy is a tug of war between consummertion, resilience and business spending. do you think we need to resolve that? at some point consumers crack or business picks up? >> i think that's the case. we're going to see. the question is -- and you're not going to see this in the data, is this a blip or the start of a trend? has the kind of i guess no certainty but at least the trade tensions have been on the back burner for a little bit. is that giving business more confidence? you're not seeing that in the earnings call the companies are doing. they're still saying they're very, very uncertain. at some point we think it's going to have to spill over. >> the economy to many people might be quite good. they might say things are resilient, things are ok. the feds made the right decision. >> i think given what they know right now they've sort of
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exhausted this preemptiveness. i think chair powell does face a pretty divided committee. he had half that didn't want to cut at all. i think they pushed this mid cycle adjustment. now they need validation. so we have been calling for a pause but i think market prices is much too optimistic. we still don't know that the global growth picture has really moved much higher. so i think if the hiring picture slows down we think the fed will be back in. they need a material reassessment. it's not going to be one rate cut, it will be three or more. >> do you think we could get three cuts in 2020? >> that is our forecast because we think over the next six months there will be a material reassessment which will come in. maybe they'll have to do more. if there's no recession, they'll at least 275. notes the fed is pee hind the curve, overestimate the probability of
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compromise and underestimate the spillover impact. you stand quite bearish. >> i do. i think what's missing in this is going down to the grassroots level. what we're hearing from companies is they're struggling with margin pressure. so they're feeling the impact of trade, they're feeling the impact of higher cost from their suppliers, and it's having an effect. how do companies traditionally respond? they cut costs. what does that mean? it means fewer employees and it means less cap. i think all of that is in the hordsen. it's approaching very rapidly. i think the fed is somewhat naive to assume that everything is fixed for now so i do expect things to continue to slow down. >> i know you're keen to get to the market call. what is the market call in treasuries? >> i think we've had the backup, i think there was good reason for it, i think we've had some crossover buying from
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tourists that were looking for some form of insurance from other asset classes they own. now the big money's coming in. the ecb has turned on the spigot again to q-e and you're not seeing at a higher yield and with the slowdown people are seeing globally they're looking to the u.s. as a high-yield market again. >> i wouldn't go as far to say duration is a buy at this point. i do think, is it possible to get three or more cuts next year? absolutely. it's certainly a lot greater probability that the fed is going to start hiking again. i don't see any real scenario that happens in the next couple of years. >> wynn you say there's a dwirgeance between equity and fixed income, what do you focus on? > the overall level of yields. if you believe with the equity market is telling you, you have 20% plus return, and just where multiiples have gotten to you wouldn't have yields as low as they are.
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yields should be higher if you think the economy is going to be fine. we're 11 years into an expansion. it will be nice in theory. it will be nice if the world worked that central banks had this magic power to keep us steady. the reality is there is shocks in the system. it wouldn't be the worst thing in the world if we had a mild slowdown. again we're not using the r word but we could have below trend growth for quite some time. >> the markets are telling me exactly the same thing. there's a tremendous pile of cash that has been printed over the last decade sloshing around on the 17 trillion size central bank balance sheets. it's looking for a home. it's taking bond yields right down in government bonds because there's no inflation and although things are slowing down, until you see a recession and until you see a projection of much lower corporate earnings, money will continue to go into equities and
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continue to go into credit. it's sort of this goldie locks environment that the central banks have created for now. but it certainly doesn't look like the future to us. >> i think there's another dichotomy which i will highlight, every time the fed has eased, risk assets have gone up. we did not get the curve moved the curve flattened. all three rate cuts it's flattened. so the market agrees with bob that the fed is making a mistake. i think the equity market is saying everything is fine for now so therefore reach. >> real scary thing though is the question is if we do get weakness is further easing going to matter? the fed can pat themselves on the back all they want. the reality is the problem in the economy wasn't that the price of credit was too high. right? so the fed maybe impact sentiment but it's not like a 75 basis points makes a whole
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lot of difference to the real economy. if we get weaker is it going to make a difference to -- >> quickly bob. >> it does because we've already seen that mortgage reif is are at a very high level. so high in fact that the treasury has reached its cap on what it can reinvest in the mortgage market. so these drops lower in yield do create some discretionary income across the board. consumer level right now corporate america down. >> i agree keeping the consumer going. but how much more is there to go? what happens if we start to see weakness? is further rate cuts -- you're not going to get the same response. >> why not go to zero? just get to zero. you don't have to worry about inflation, see what happens. you can always take it back. >> we can become europe. >> you two don't need me today. we'll go do another show shortly. coming up on this program the auction block.
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a quiet week in high yield. that conversation coming up next.
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the united states investment grade borrowers sold debt over two sessions ahead of the fed among the standout $4 billion to back its purchase. finally in high yield the junk bond issue has largely remained
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on the sidelines. staying with high yield, credit quality is taking center stage. >> you've got to get income. every time i think the high yield market has run out of gas i try to buy high quality high yield and high quality loans. it's really hard to buy it but you can buy as much as you want of the weaker stuff. demand for yield continues. >> your view on the demand for credit right now. >> i wish i could disagree with rick. i like to disagree with him but there's nothing really new here. it remains a very bifurcated market. you look at anything -- i hate to use ratings classes, double b solid paper there's a huge bid for it. deal comes that's way oversubscribed and anything with any hair whatsoever you can't give away. if you would have told us high yield is going to be up 12, 13%, whatever it's up year to date, i would have said it would be up 6.
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it's kind of the reverse. 14, 5. and we think -- you would think that's an opportunity to go the other way. we don't think so. we think the risks is in the triple c area. >> do you agree? >> there's certainly a lot of demand for high yield going on here. i do agree. if we look at the loan market versus the high yield market the loan marketed now has a yield that's 50 to 70 basis points higher than the high yield market. usually that's inverted. so that's telling you that investors in the loan market are demanding more yield to hold those securities because that's where all the concern about the lack of covenants resides. >> i think we've gone from reachful yield to quality which is very different from last year. fourth quarter last year was the high grade stuff that underperformed. so i read that more as a liquidity event. what i'm reading now the tea leaves suggest investors are
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getting nervous about the behavior, going up in quality. this is normally a good sign for treasury, for example, because you would want something to hedge. the only hedge for risk asset now is going to be long division treasury. so i would still rather be lower in rate, higher in quality. >> one thing i spent the week trying to get my head around is whether what we're seeing is a broader credit risk story or pockets of stress. so bring up high yield for instance that's spread between double b's versus triple cs. is that just an aversion to floating rate or is it credit risk starting to bubble away? what is it for you? >> i think there is credit risk at the bottom end and that's why you have to be cautious. i think there's parts cheaper than the high yield market. there is one risk that is not credit related that i think investors aren't talking about. maybe it's low probability given that we don't think
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yields are going up all that much. if they did people are buying a lot of payer maturing in five to seven years that have call dates in one to two years. if what happened in 2013 happens -- again not a base case -- that's paper is going to lengthen tremendously and underperform by a large amount. maybe not high probability but big impact. >> i think people aren't afraid of credit right now. i think every time they try to go up in quality or raise a little cash they don't see the default rates going up, they don't see the dire earnings warnings. and then thashe forced back into the market. until we get further into this cycle and see things slow down more and see it in corporate earnings, money will continue to go in. >> do you think they should be afraid? >> i absolutely do. >> why? >> because i think that the cracks there are real. i think that what you're seeing in the loan market there's been a tremendous amount of credit extended that's wound up in
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clo's that doesn't have the covenents that you need. you can't simply dismiss high yield market. it's energy. you are getting legitimate earning warnings, somebody like capper piller is out saying guess what, the trade war are having an impact and our guidance going forward is going to be lower. it's easy to get out now and wait it out rather than think you're going to be the person that picked up the last nickle in front of the steam roler. >> you want to weigh in? >> here's where i disagree. i share your concerns in the short term about the high yield market. the question is where are you going to go with the money? that's always the question. how we view it is you just have to expect lower return. in essence the very strong returns we've seen this year have borrowed from the future and investors have to expect lower than coupon returns probably in the next year or two. >> we've seen that through 2019. if you can bring up the high yield spread here in the united states just over the last year or so for much of the last ten months or so we've established this really tight trading
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range, and i say it tight. in and around 350 to 450. we get to the year to date highs. we've bounced off them, we approach 425, 450, and the buying starts again. what does that tell you? when do we start to break out of that kind of trend and what does it tell you about the jitters of this market not once not twice but three times? >> it will be the pressure to make it and the fact that the u.s. consumer, the service sectors still are fairly resilient. you can't point to any data and saying this is showing the consumer is falling apart. which is why i think we're staying in that range. i think that's the range in which treasury is going to stay. so the ten year stays 150 to 2%. it's when you start seeing -- and i'm watching for pmi data. i think that's more leading. if you see the service pmi continuing to decelerate in the months ahead, i wonder if then the mark ro environment will come up more for the credit investors where you say really
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it's about time that we cut back on the lower quality. until the data is ok, i think we stay in that narrow range. >> final word. >> averages are misleading. spread on double b, and triple c, until you see that trend break those are going to offset each other. >> stick with me. coming up still ahead the final thread the week ahead featuring a rate decision on the bank of england and a slope in pmi report. that's coming up next.
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>> from new york city, this is bloomberg real yield. time now for the final spread. starting on monday, we have china and euro zone pmi. tuesday and wednesday, then on thursday a rate decision from
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the bank of england. friday inflation numbers out of china. with me for some final thoughts. guys, let's get to the news on the trade story. china says it has received a consensus in principal with the united states. how do you characterize the story between the united states and china? what amazes me is how assessments of the global economy seem to change from week to week based on where we are with the trade talks and from one data point to the next. >> i think there's an assumption that the weakness in global growth and manufacturing is all because of trade. i would argue the weakness started before the trade war. it hasn't helped but if you think it all hinges on the u.s.-china trade deal then do we have a deal or do we not have a deal? i think that's why a lot of people are getting whip sawed. when i look at the headline, i thought we had this two weeks ago. we have no details. our view is it's going to be
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agricultural products, no rollback of tariffs. so if i'm corporate and thinking about my supply chain over the next year the worst-case scenario has been taken off the table. i don't think my base has changed a lot. >> we live in an environment where we can get a tweet from the president of the united states that says something different. that's the real key is the uncertainty. if the tariff situation was actually bad but more certain, i think that business would have more confidence than just complete uncertainty. remember this is a president who started up with mexico not that long ago. not just about china. it's unpredictable. i'm not just putting it all on this president. the political situation is very uncertain. if he's going to say we can't ignore the fact that the democratic party has very different ideas of how to manage the economy and markets aren't pricing that in today. >> we want to be hopeful that there will be a compromise on trade but we're skeptical. what does this actually mean?
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do they agree to continue the quferings? is it we sell -- conversation? is it we sell agricultural products that we need to sell to somebody who needs to buy them? what about the real issue? what about ip rights? what about tech? what about security? when will those be discussed? that's why we have the skepticism. >> i think we'll make progress. we're going to do a final round. three quick questions, three quick answers. if possible. the fed has done a fed pause before, started earlier this year and then they started to cut interest rates. will it last more or less this time around? more or less? >> less. >> less. >> less. >> there's some consensus. the year end on the ten-year yield higher or lower than where the two-year yield is right now? the reference point the two-year is 157 will the ten-year end the year higher or lower? >> lower. >> lower. >> you have a coin?
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>> i don't have a coin. >> i don't know. >> third and final. leverage loans or high yield. pick your poison. i'm looking for surprise at the end of this program. >> high yield. >> neither but if you force me to high yield. >> loans or high yield? >> three months loans, 12 months high yield. >> guys, appreciate your time. thank you very much. what a week. that does it for us from new york city for our audience worldwide we'll see you next week, same time, same place. this is bloomberg real yield.
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